Chapter 4 Understanding Accounting Issues.docx

Chapter 4 Understanding Accounting Issues
Accounting: comprehensive system for collecting, analyzing, and communicating financial
information
- measure business performance, sales, expenses, profits, or loses
- translate this info so managers (and others) can make decisions
2 Types of Accounting
- financial accounting: tells external users about financial condition of firm (looks at
business as a whole), collected on an annual basis
- managerial accounting: tells internal users about performance and problems. For
planning, decision making and control purposes (looks at individual products,
plants, or divisions)
Bookkeeping: recording accounting transactions
Accounting Information System: organized procedure for identifying, measuring,
recording, and retaining financial information so that it can be used in accounting
statements and management reports
Users
- business managers: set goals, develop plans, set budgets
- employees and unions: get paid and to plan for and receive benefits
- investors and creditors: estimate returns to stockholders, determine company’s
growth prospects
- taxing authorities: plan tax inflows, determine tax liabilities of individuals and
businesses
- government regulatory agencies: rely on accounting info to fulfill their duties,
provincial securities commissions
Controller: individual who manages all the firm’s accounting activities
Financial Accounting System: process whereby interested groups are kept informed
about the financial condition of a firm
Managerial (management) Accounting: internal procedures that alert managers to
problems and aid them in planning and decision-making
Chartered Accountant: individual who has met certain experience and education
requirements and has passed a licensing examination; acts as outside accountant for other
firms
Certified General Accountant: individual who has completed education program and
passed national exam; works in private industry or CGA firm
Certified Management Accountant: individual who has completed university degree,
passed national examination, complete strategic leadership program; works in industry and
focuses on internal management accounting Audit: accountant’s examination of a company’s financial records to determine if it used
proper procedures to prepare its financial reports
Forensic Accountant: accountant who tracks down hidden funds in business firms, usually
part of criminal investigation
Generally Accepted Accounting Principles (GAAP): standard rules and methods used by
accountant in preparing financial reports
- all businesses must use same rules and methods
- most common set of rules
- set by Canadian Institute of Chartered Accountants
Management Consulting Services: specialized resolve a variety of problems in finance,
production scheduling, and other areas
Private Accountant: accountant hired as a salaried employee to deal with a company’s day-
to-day accounting needs
Accounting Equation: Assets = Liabilities + Owner’s Equity
Asset: anything of economic value owned by a firm or individual
- possessions available to a business
- things that can be sold or given away
- a store of value
- potential source of cash
Liability: any debt owed by a firm or individual to others
- money borrowed or owed
- one of two ways of acquiring an asset
Owner’s Equity: positive difference between firm’s assets and its liabilities
- contains amount that owners original invested
- profits earned by and reinvested in the company
Double-Entry Accounting System: bookkeeping system, developed in fifteenth century
and still in use, requires every transaction be entered in two ways (how it affects assets and
how it affects liabilities and owner’s equity)
Financial Statement: several types of broad reports regarding company’s financial status;
often used in reference to balance sheets, income statements, and or statements of cash
flows
Balance Sheet: type of financial statement that summarized firm’s financial position on